Many people wonder why the US government expands the healthcare coverage to some 45 million uninsured American and legalizes some 15 million undocumented immigrants at the time when US is running "perpetual" large fiscal deficit and having 100+% Debt-to-GDP ratio?
If America is so broke, how could it afford to add such massive human expenses on its balance sheet? ( I am in favor of both reform, though I suspect the timing.) I think that the key is to manipulate the near-term GDP number.
According to usdebtclock org website, both CBO and OMG have projected real GDP to reach about $19.5 Trillion by 2017 while projecting the total outstanding debt to reach $20 Trillion. The close-to 100% GDP-to-debt ratio might give an impression of long-run solvency of US finances, instead of the alternatively 127% based on the estimate of current trend.
However, in order to go from the current $16 Trillion Real GDP to $19.5 Trillion in four years, the compounded real GDP growth rate have to be averaged 5+% annually. Apparently the QE programs from Federal Reserve and massive runup in stock and housing markets have only accomplished 2.5% in the latest quarter. As the pump-up effect of these programs are wearing off, the Congress is forced to step in with the Healthcare Reform and the Immigration Reform to help the future GDP numbers.
Many people would wonder how can one raise the GDP growth by including tens of millions of people who have little means to pay into the system? The trick is to increase the newly created GDP growth more than the new debt incurred. Let us do some simple maths here:
It is all a game of increasing the GDP growth faster than increasing the debt load.
These tens of millions of needy are just just tools for some to postpone the eventually collapse of this debt bubble.
(1) Healthcare Reform
Assuming $1000 healthcare expense for each of the 45 million uninsured, the increase in annual spending is $45 billion. However, the extra spending, even if all covered by government debt, will have multiplier effects to the entire healthcare industries and other related industries, the total positive effect on the GDP could be 5 x 45 = $225 Billion annually. The healthcare cost for the already insured people might increase due to sudden imbalance in supply and demand. That should contribute to the GDP growth nicely.
My guess is that the insiders are hoping to healthcare reform to add 1% to 1.5% in GDP growth for the next four years.
(2) Immigration Reform
Assuming half of the newly legalized undocumented immigrants are on the benefit-roll, and assuming the annual total payout is $10,000 per person, including direct food assistance, housing assistance, free healthcare etc and indirect assistance, then the increase in annual spending for those on benefit-roll would be 7.5 million * 10,0000 = $75 billion. After adding the multiplier effect, the total contribution to GDP could be $375 billion. The other half, who are not on the "welfare roll", could have higher contribution to the GDP.
If these two program can generate on average 2% annual growth over the next four years, on the top of 2% annual growth already forecast by the Federal Reserve, then we could get close to fulfill the prediction made by OMG and CBO, by running $1+ trillion annual budget deficit. By 2017, we still have a 100% debt-to-GDP ratio.
But the only worry is that what will happen after 2017, when the marginal contribution of such programs too GDP growth dimish? Continue to merge with Canada and Mexico? Or risk the unpleasant collapse of the PONZI scheme? Why does nobody in Washington DC care about offering, or even comtemplatiing on, a long-term solution to the debt problem?
Additional QEs will not work, because the MONEY in the economic system is created by the banking system, shadowy banking system, and by investor's and consumer confidence.
Without those actual money/credit creators' active participation, any QE will only have little or temporary effect.
Where is the long-term solution for the perpetual fiscal deficit and the ballooning debt problem?
It is funny that I did not even hear any buzz about this topic, except from Senator Portman.
Senator Portman seems to have made some practical proposal to start the debate on the long-term solution of the perpetual fiscal deficit and debt malaise. But so far, there is no taker.